The Capital Asset Pricing Model:
A)has serious flaws because of its complexity.
B)shows the relationship between risk and expected return.
C)was developed by Markowitz in the 1930s.
D)is a discounted-cash-flow valuation model.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) shows the relationship between risk and expected return, specifically the required return on an investment. While it may have some limitations in practice, such as relying on some assumptions that may not always hold true, it is still widely used in finance as a tool for evaluating investment opportunities. The other choices are incorrect: A is incorrect because complexity alone does not make a model flawed, and there are many complex models that work well, including the CAPM in certain contexts; C is incorrect because the CAPM was actually developed by William Sharpe in the 1960s, building on ideas from earlier thinkers like Harry Markowitz; and D is incorrect because the CAPM is not a discounted-cash-flow valuation model, but rather a way of estimating expected returns based on an asset's sensitivity to market risk.